GOVERNMENTS across the world should focus on protecting the purchasing power of citizens as the La Niña weather phenomenon is expected to further increase inflation in 2023, according to the International Monetary Fund (IMF).
In a Blog, IMF economist Christian Bogmans, Chief of the Commodities unit Andrea Pescatori, and Senior Economist Ervin Prifti said food prices will primarily be affected by the La Niña.
The extreme weather phenomena will place additional upward pressures on commodity prices on top of the impact of the continuing war in Ukraine and rising energy prices.
“The risk of food prices increasing again rather than declining during the next couple of quarters remains high. And if these risks weren’t enough, the impact of rising interest rates on food insecurity could be mixed,” the experts said.
“That’s because a resulting slowdown in economic activity may reduce personal incomes. Combined with still elevated food price levels, this could increase the number of food insecure people,” they added.
They noted that the La Niña is expected for the third straight year in 2023. This is similar to three-year periods which occurred during the first world food crisis between 1973-1976 and again between 1998-2001.
Last week, National Statistician Claire Dennis S. Mapa said the highest inflation rate on record using the latest data series of the Philippine Statistics Authority (PSA) was 10.7 percent in January 1999 (full story: https://businessmirror.com.ph/2022/12/07/inflation-easing-plan-lacking-its-8-in-november/).
The IMF experts said higher international food prices are estimated to add 6 percentage points to consumer food inflation in 2022.
Locally, should this materialize and if the country’s year-to-date inflation of 5.6 percent as of November would be the full year inflation rate, the country’s inflation could exceed 11 percent next year.
“However, the passthrough to higher domestic retail food prices could take six to 12 months—another reason why, in addition to the recent weakening of emerging market currencies, many people will have to wait for relief from lower commodity prices,” IMF said.
In order to cushion the impact on food prices, the experts said countries should increase targeted social protection spending to a point that their budgets allow. This should be done while allowing higher global prices to pass through domestic costs of goods.
The expert said that countries should also stimulate domestic food production, while avoiding stockpiling and using reserves, especially those that have accumulated higher stock levels.
“This is necessary to allow price signals to rebalance food markets and at the same time to protect vulnerable families’ purchasing power,” the IMF experts said. “External debt relief and grants from international organizations could help finance the expansion of social assistance schemes in developing countries.”
The experts also noted that high energy prices would lead to more expensive fuel and fertilizer prices. Likewise, they noted, fertilizer prices have doubled compared to the prepandemic period, despite the “pullback in recent months.”
Citing previous IMF research, the experts said around 45 percent of any change in fertilizer prices would feed directly into global cereal prices within four quarters. Given these findings, they said it is possible that the impact of energy costs may not immediately lead to high fertilizer prices.
“In poorer countries, where farmers use fertilizer more sparingly, reduced use may diminish harvests,” IMF said.
PHL context
Last week, local economists said Filipinos will continue to suffer under the weight of high commodity prices, especially if no measures to address supply-side issues are undertaken to cool down inflation.
The PSA reported that inflation averaged 8 percent in November on the back of expensive food and non-alcoholic beverages as well as furnishings, household equipment and routine household maintenance.
“The inflation right now is not at its peak yet. Global conditions remain in flux, but more importantly, we don’t have an inflation plan apart from the BSP’s [Bangko Sentral ng Pilipinas] interest rate policy. Unfortunately, this is not enough since the inflation is caused by supply-side factors,” Ateneo de Manila University economist Leonardo Lanzona Jr. told the BusinessMirror.
Department of Economics Chairperson Alvin P. Ang said the country’s inflation rate will remain above 5 percent the whole year of 2023 and will mainly be driven by supply-side constraints.
Efforts to address supply-side constraints, Lanzona said, should include government investments in developing a productivity program to increase exports and domestic products.